The downgrade of Tesco’s long-term debt ratings by Moody’s was widely reported to have heaped further pressure on CEO Philip Clarke.

The ratings action was Moody’s second downgrade of Tesco in two years, while Standard & Poor’s also has the retailer on negative watch.

But what practical effect will the ratings downgrade to Baa2 – the second lowest investment-grade rating available – have on Tesco’s business?

In purely financial terms, the answer is probably “not a lot”.

That is not to say that a ratings downgrade does not potentially have a huge impact on the company’s ability to borrow money at competitive levels. Typically lower ratings mean companies have to borrow at more expensive rates as, in basic terms, a credit rating is a reflection of how likely investors are to lose their money.

So Moody’s downgrading Tesco twice since 2012 is likely to have an impact on Tesco’s ability to refinance debt. But in Tesco’s case it has little pressing need to seek new funds in the short term, meaning the impact of the ratings downgrade is likely to be limited to the price of its bonds that have already been placed with investors.

“From Tesco’s perspective, there is little imperative to be seeking new funds from the bond or equity markets,” says Shore Capital’s Clive Black. “This view reflects relatively late maturities of existing bonds corresponding with the group’s material cut in capital expenditure.”

Tesco has issued a number of bonds in a variety of currencies (Sterling, euros, US dollar and Yen) but the majority of these bonds have maturities dated 2019 and well beyond.

Where the impact may be more keenly felt is the further reputational and PR damage it causes to the perception of Tesco’s turnaround efforts.

The company was keen to paint the news as a reflection of industry-wide trading conditions.

Tesco stated: “Moody’s announcement reflects the challenges for the sector as a whole, and the impact that they expect this is likely to have on our near-term performance. However, they also acknowledge we have a plan to address structural challenges in the sector and we remain market leader both overall and in online and convenience which are critical to future growth.”

That much is true and the downgrade was no surprise – movement in Tesco shares and the price of its debt was negligible after the announcement and Moody’s has no expectation of a further downgrade. Additionally, Morrisons was already downgraded by Moody’s to the same level as Tesco earlier in the year and Sainsbury’s even dispensed with its corporate ratings altogether back in 2010.

But each piece of negative news further chips away at Tesco’s narrative that it is successfully dealing with the sector challenges and has the right strategy to do so.

Philip Clarke last month effectively issued a plea for time when it announced a 3.7% fall in first quarter like-for-like sales. The drip-feed of negative stories Tesco is experiencing does not help to slow down that ticking clock. 

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